The Office, Surpluses, and the Affordable Care Act’s 80/20 Rule
This post was updated on January 31st, 2022 to correct some terminology. Earnings for insurance carriers are confined to 15-20% of premiums. Profit margins are closer to 3-6% after subtracting operating experiences.
Work in corporate America for any length of time and you quickly understand how budgeting and budget surpluses are handled.
Here I will let Oscar Martinez explain it.
“So what you want to do is spend that dollar [surplus] on something now, so that your parents think it costs ten dollars to run the lemonade stand…”
“We have to spend that $4,300 by the end of the day or it’ll be deducted from next year’s budget.”
It appears that having to return a surplus at the end of the budget period, incentives entire departments to care less about what things cost and spend money on things they otherwise wouldn’t.
The “use it or you lose it” mentality. You’re playing with “company money” right?
What does this have to do with the Affordable Care Act?
The health care law provided two ways to hold insurance companies accountable and help keep your costs down – one of those was the 80/20 rule and rebates.
https://www.healthcare.gov/health-care-law-protections/rate-review/
But the 80/20 rule and rebates sound a lot like budgeting in corporate America to me and create similar misaligned incentives.
“Use 80 cents out of every premium dollar” or let your customer know you overcharged them and go through the administrative headache of returning premiums in the form of rebate checks.
We’ve been fooled into thinking that the 80/20 rule incentivizes insurance companies to efficiently use premium dollars, so they can return un-utilized premium dollars to customers in the form of rebates.
Here is an example below.
https://www.healthinsurance.org/obamacare/billions-in-aca-rebates-show-80-20-rules-impact/
This statement assumes, because the majority of customers DO NOT receive MLR rebates, this means insurance companies are making efficient use of premium dollars and 80 cents of every premium dollar is what’s required to fund a members healthcare costs and improve quality of care.
If we use the KFF 2021 Annual Survey’s average annual premiums for an employee $7,739, that means on average it costs $6,191 (80%) annually to fund a members healthcare costs and improve the quality of care they receive.
https://www.kff.org/report-section/ehbs-2021-summary-of-findings/
Otherwise insurance carriers would be delivering a lot lot more rebates to customers, because care was being deliverable at an annual cost lower than $6,191.
I think the 80/20 rule actually incentivizes insurance companies to care less about lowering members healthcare costs.
It incentivizes them to care less about negotiating prices more aggressively with providers and meticulously reviewing claims for errors and overcharging.
So what if a carriers negotiated rate or settled claim charge with a particular provider is 500-800% over another carriers negotiated rate, the Medicare rate, or the cash pay rate?
By caring less, insurance carriers are able to hit the 80-85% requirement faster, collect their 15-20% revenues, and avoid the administrative hassle of calculating and delivering rebate checks.
And since earnings are confined to 15-20%, the fact that the overall cost of delivering healthcare to members has increased, gives them a stronger case for increasing annual premiums and allowing the overall pie to grow.
Just blame is on “rising medical trend.”
This model has worked well for the insurance companies.
But what if insurance companies could capture greater than 15-20% of premiums?
How would that change incentives?
1) They could continue to raise prices, while holding the expense line, and increase earnings.
2) However, might they be more incentivized to find innovative ways to spend less than 80 cents of every premium dollar on member healthcare costs?
While maintaining quality of care.
What if they used significantly lowering annual member healthcare costs as a method of increasing profits? All while maintaining or even reducing prices?
I’d say it’s going to take an act of Congress to get this done, but isn’t the ACA one of the factors that created this mess?
I digress….
So what can we do? Just complain and bemoan “the system”?
“If you have an objection to some existing institution – build, found, or fund a better alternative.
This is the most constructive form of criticism.”
No we can build, found, fund, or join a better alternative.
For employers, you can exit the fully-insured markets, setup a self-funded health plan, and have greater control over incentives and member healthcare costs.
Self-funded plans all across the country have been successfully delivering high quality healthcare options to members at well below $6,191 PEPY – using the power of cash pay facilities, direct contracting with providers, and Reference Based Pricing (RBP).
For individuals, you can seek an employer who has adopted the self-funded model and has the vendors in place to educate providers and advocate on your behalf.
Or you can exit health insurance completely by leveraging the power of cash pay and community crowdfunding.
Don’t let the misaligned incentives created by ACA, allow insurance companies to excessively profit from a surplus of your, your family, or your business’s hard earned dollars.
Build, found, fund, or join a better alternative.